NCERT Notes Class 10 Social Science Economics Chapter 3 Money and Credit
Chapter 03: Money and Credit - Study Notes, Questions and Answers / NCERT CBSE TextBooks Solutions Class 10 Economics Chapter 03 Money and Credit
* Introduction:
Barter system was a historical method of exchange of one person’s goods for another person’s goods based on want. If Person A had X product and wanted Y product, and Person B had Y Product and wanted X product, Person A and B would barter/exchange their goods. The Double Coincidence of Wants played a huge role in the barter system, which is a limiting factor since Person A would not always want Person B’s goods. Therefore, Money came into existence. Money was the intermediate commodity that was given from one party to another. Money acts as a Medium of Exchange in all Transactions. E.g., Currency, Deposits in Banks.
This developed further into the complex economic system that we are a part of, today.
* Money as a Medium of Exchange: There is a vegetable vendor. There is a Rice Vendor. But they cannot exchange vegetables for rice if they do not have a
double coincidence of wants. Therefore, Vegetable vendors will find a buyer to exchange their vegetables for money and go to the rice vendor and buy it. Same
way, Rice vendor will find a buyer for his rice, for money, and with that money, he will buy vegetables.
* Modern Forms of money are Currencies (paper notes and coins) and Deposits in Banks: In India, the Reserve Bank of India issues currency notes on behalf of the Central Government. No other person or institution can issue currency.
* Deposits in Banks: After receiving a salary at the end of every month and monthly expenses, extra cash is deposited in Banks, which is kept safe and fetches some interest at the end of every year. Money can be withdrawn from these deposits at any time through cheques and ATM facilities.
* Cheque: Sometimes, money is paid through cheques instead of cash. A Cheque is a piece of paper instructing the bank to pay a specific amount from the account of the person issuing the cheque, to the person in whose name the cheque has been issued.
A Cheque will have the following details:
1. Name of the person/organization to whom the cheque is issued
2. The date of transaction
3. The sum of money to be transferred – in numbers and words
4. The Account number from which the sum is to be issued
5. The information of the Bank Branch which is native to the account number
6. The cheque ID
7. The coding used by the banks for processing payment
8. Signature
* What do banks do with the money that is deposited with them: Banks hold on to 15% of the deposits as cash, to be able to pay depositors who wish to
withdraw money. The bank uses the remaining deposit to extend the loan facility. The bank earns from the difference between the interest they pay to the
depositors and the interest charged from the borrowers.
* Credit: Sometimes, a party needed a commodity or service immediately, but did not have the money for it. In such cases, the concept of Credit comes into play. Credit is an agreement where the lender supplies the borrower with money, goods and services in return for the promise of future payment from the borrower.
* Loans in Banks: Depositors can get loans from banks for purposes of a business, purchasing assets, medical, and so on.
* Terms of Credit: Interest rate, collateral, documentation requirement, and the mode of repayment together comprise the Terms of Credit.
* Collateral: Loans/credit are bought for Collateral; this means that the Assets owned by borrowers, and use this as a guarantee of payment to the lender until the loan is repaid. If the borrower can not repay the loan to the bank, then the bank has the right to sell the collateral as a means of repaying the loan.
* Formal and Informal Credits:
● Formal Credits are Loans given by Banks and Cooperatives. Reserve Bank of India monitors Formal Credits by checking various factors like banks maintaining a minimum cash balance, loans provided not only to profit-making businesses but also for small cultivators, small scale industries, small borrowers etc.
● Moneylenders, friends, and relatives give informal credits. There is no formal body that supervises informal loans. Because of this, informal loans are unregulated and unpredictable. Sometimes, these loans will push the borrower into an increasing loan and debt trap.
Cheap and affordable credit is vital for the development of the country.
* Self-Help Group People (SHGP):
In villages, it's challenging to get loans from banks because they do not have any Assets as collateral to show banks. Also, Informal lenders will charge them a very high interest. So, they form a group and pool in money according to their capacity, and if they are regular in their savings then the bank will give them a
loan in the name of the Group, and they can use it for their small businesses.
* Textbook Exercises
1. In situations with high risks, credit might create further problems for the borrower. Explain.
Answer:
In situations with high risks, credit might create further problems for the borrower. This is also known as a debt trap. Taking credit involves an interest rate on the loan and if this is not paid back, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. If a farmer takes a loan for crop production and the crop fails, loan payment becomes impossible. To repay the loan the farmer may sell a part of his land making the situation worse than before. Thus, in situations with high risks, if the risks affect a borrower badly, then he ends up losing more than he would have without the loan.
2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Answer:
In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods
or service which he needs. This is because money acts as a medium of exchange.
3. How do banks mediate between those who have surplus money and those who need money?
Answer:
Banks keep small portion deposits as cash (15%) for themselves (to pay the depositors on demand). They use the major portion of the deposits to extend loans to those who need money. In this way, banks mediate between those who have surplus money and those who need money.
4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
Answer:
“Reserve Bank of India” and “Guaranteed by the Government” are written on top.
In India, Reserve Bank of India issues currency notes on behalf of the central government. The statement means that the currency is authorized or guaranteed by the Central Government. That is, Indian law legalizes the use of the rupee as a medium of payment that can not be refused in a setting transaction in India.
5. Why do we need to expand formal sources of credit in India?
Answer:
We need to expand formal sources of credit in India due to:→ To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.
• Cheap and affordable credit is essential for the country’s development.
• Banks and co-operatives should increase their lending, particularly in rural areas.
6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
Answer:
The basic behind the SHGs is to provide a financial resource for the poor through organizing the rural poor especially women, into small Self Help Groups. They also provide timely loans at a responsible interest rate without collateral.
Thus, the main objectives of the SHGs are:
• To organize rural poor especially women into small Self Help Groups.
• To collect savings of their members.
• To provide loans without collateral.
• To provide timely loans for a variety of purposes.
• To provide loans at a responsible rate of interest and easy terms.
• Provide a platform to discuss and act on a variety of social issues such as education, health, nutrition, domestic violence etc.
7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Answer:
The banks might not be willing to lend certain borrowers due to the following reasons:
• Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.
• The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
• The banks might not be willing to lend those entrepreneurs who are going to invest in the business with high risks.
• One of the principle objectives of a bank is to earn more profits after meeting a
number of expenses. For this purpose, it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.
8. In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?
Answer:
The Reserve Bank of India supervises the functions of banks in a number of ways:
• Commercial banks are required to hold part of their cash reserves with their RBI. RBI ensures that the banks maintain a minimum cash balance out of the deposits they receive.
• RBI observes that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, small borrowers etc.
• The commercial banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate etc.
This is necessary to ensure equality in the economy of the country and protect
especially small depositors, farmers, small scale industries, small borrowers etc. In this process, RBI also acts as the lender of the last resort to the banks.
9. Analyse the role of credit for development.
Answer:
Cheap and affordable credit plays a crucial role in the country’s development. There is a huge demand for loans for various economic activities. The credit helps people to meet the ongoing expenses of production and thereby develop their business. Many people could then borrow for a variety of different needs. They could grow crops, do business, set up industries etc. In this way, credit plays a vital role in the development of a country.
10. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.
Answer:
Manav will decide whether to borrow from the bank or the moneylender on the basis of the following terms of credit:
• Rate of interest
• Requirements availability of collateral and documentation required by a banker.
• Mode of repayment.
• Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has to borrow from the bank or the moneylender.
11. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.
(a) Why might banks be unwilling to lend to small farmers?
(b) What are the other sources from which the small farmers can borrow?
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.
Answer:
(a) Bank loans require proper documents and collateral as security against loans. But most of the times the small farmers lack in providing such documents and collateral. Besides, at times they even fail to repay the loan in time because of the uncertainty of the crop. So, banks might be unwilling to lend to small farmers.
(b) Apart from a bank, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives, SHGs etc.
(c) The terms of credit can be unfavourable for the small farmer which can be explained by the following –Ramu, a small farmer borrows from a local moneylender at a high rate of interest i.e. 3 per cent to grow rice. But the crop is hit by drought and it fails. As a result, Ramu has to sell a part of the land to repay the loan. Now his condition becomes worse than before.
(d) The small farmers can get cheap credit from different sources like – Banks,
Agricultural Cooperatives, and SHGs.
12. Fill in the blanks:
(i) Majority of the credit needs of the __________households are met from informal sources.
(ii) __________costs of borrowing increase the debt-burden.
(iii) __________issues currency notes on behalf of the Central Government.
(iv) Banks charge a higher interest rate on loans than what they offer on __________.
(v) __________is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Answer:
(i) poor
(ii) high
(iii) Reserve Bank of India
(iv) deposits
(v) Collateral
13. Choose the most appropriate answer.
(i) In an SHG most of the decisions regarding savings and loan activities are taken by
(a) Bank.
(b) Members.
(c) Non-government organisation.
Answer: (b) Members.
(ii) Formal sources of credit do not include
(a) Banks.
(b) Cooperatives.
(c) Employers.
Answer: c) Employers.
* Important Questions & Answers:
1. How does the use of money make it easier to exchange things?
● The barter system relied on the concept of Double Coincidence of Wants.
● When Person A has X Goods and wants Y Goods, and Person B has Y Goods and wants X Goods, then Person A and Person B have double coincidences of wants, and they exchange their goods.
● Suppose Person A has X Goods but wants Z Goods, and Person B has only Y Goods, then Person A will have to find someone with Z Goods who may or
may not want X Goods. This becomes inconvenient for all parties involved
● Money acts as a Medium of Exchange.
● When Person A wants Y Goods, he can directly approach Person B who has Y Goods and can purchase the goods with money. Person B can then use that money to buy what they want, which Person A may or may not have.
2. Can you think of some examples of goods/services being exchanged or wages being paid through barter?
● Roman soldiers were paid salt in exchange for their services in the military
● Barter systems are sometimes used where money devalues quickly (hyperinflation) like the Crisis in Venezuela during the Bolivarian Revolution.
3. Why are demand deposits considered money?
● Demand deposits are a facility that offers the medium of exchange, much like money.
● A cheque is written out to the person who needs to be paid. The cheque instructs the bank to release the required payment from the deposit of the
person issuing the payment.
● Here, an exchange has taken place without the involvement of currency, to the same effect.
● Thus, demand deposits are considered money.
4. Why do lenders ask for collateral while lending?
● Lenders ask for collateral while lending money as a guarantee of payment
● Suppose the borrower is unable to repay the loan, the lender has the right to sell the collateral and repay their loan
● This is done as security against payment default, in which case the lender will take a huge loss.
5. What are the differences between formal and informal sources of credit?
● Formal sources of credit are loans given by banks and cooperatives.
● Informal sources of credit are loans provided by parties other than banks and cooperatives – like moneylenders, friends, relatives, etc.
● The key difference between these two sources of credit is that the Reserve Bank of India monitors formal credit. As a result, the interest rate for lending is always reasonable. The way of repaying loans is also monitored, and fairways of requesting repayment are conducted.
● Informal Credit is unregulated and is not supervised by any formal body. Because of this, the interest rate levied on the informal loan is very high, to the point where the borrower’s earnings reduce drastically to pay back the loan.
Sometimes, the informal lenders may use unethical ways to get the loan repaid.
6. Why should credits at reasonable rates be available for all?
● Credits at reasonable rates should be available for all to promote equality of opportunities.
● Everybody who wants to improve the economy with their services should be given a chance to have the monetary means to start their businesses or buy their assets.
● Regulated credit must be available for all to check the rate of inflation in the country. Time value of money must be controlled.
● This must be available also to reduce instances of informal credit, where the interest is high, and which will hurt the livelihood of the borrowers. If all the earnings of the borrower get spent in repaying huge interest of informal credit, the borrower will have to quit their business, which is not favourable.
7. In a situation with high risks, credit might create further problems for the borrower. Explain.
● Situation with high risks indicates that the borrower will face trouble repaying loans.
● The loan is repaid with the revenue that the borrower makes in his business.
● In high-risk professions like agriculture, the revenue generated is dependent upon the performance of crops. In a situation where the crops fail due to poor rainfall, the agriculturist would not be able to earn revenue from their crop yield. In such a situation, they will fail to repay the loan in time, and the interest will keep mounting. In the next phase, they will have to double the crop yield to be able to repay a considerable portion of the loan without expecting to retain earnings.
● Situations like these put the borrower in a troublesome position.
8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
● Reserve Bank of India is a central authority that supervises the loan and other financial activity of banks.
● Reserve Bank of India monitors banks in the following ways:
i. RBI supervises formal loans issued by banks – it regulates the interest rate for these loans based on the overall performance of the economy and the purchasing parity of the people
ii. RBI sees to banks maintain a reserve of cash which is available for depositors who wish to withdraw money
iii. RBI makes sure banks issue loans not only to profitmaking businesses but
also to smaller-scaled borrowers for various economic activities.
9. Fill in the blanks:
i. Majority of the credit needs of the poor households are met from informal sectors
ii. The Reserve Bank of India issues currency notes on behalf of the Central Government.
iii. Banks offer a higher interest rate on loans than what they offer on interest for money deposits.
iv. Collateral is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender
10. Choose the correct answer:
● In an SHG, most of the decisions regarding savings and loan activities are taken by
i. Bank
ii. Members - CORRECT
iii. Non-Government Organization
● Formal sources of credit do not include
i. Banks
ii. Cooperatives
iii. Employers - CORRECT
PSC Solved Question Papers ---> Click here
PSC EXAM PROGRAMME -> Click here
CURRENT AFFAIRS QUESTIONS -> Click here
PSC Degree Level Questions & Answers - Click here
PSC 10th, +2Level Questions & Answers - Click here
PSC RANK LISTS / SHORTLISTS -> Click here
0 Comments